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Sunday, May 01, 2011

Be gone, AP system...

The Star, Focus
Sunday, May 01, 2011 8:29 AM

What it takes to move our auto industry forward

The cost of cars is always a hot topic.

Last month, International Trade and Industry (MITI) Minister Datuk Seri Mustapa Mohamed again publicly reiterated that the number of Approved Permits (AP) for imported cars was still being kept at 10% of car sales, with 4% for franchise holders.

Why is the Government maintaining the AP system? Is there still a need to protect the industry players who have benefited so much over the last four decades?
The Prius hybrid. With surging oil prices, the trend worldwide now is rapid development and utilisation of advanced technology in electric, hybrid or alternative-fuel vehicles.

In the 1970s, the automotive industry was seen as the forerunner industry for countries attempting to industrialise.

The automobile contains hundreds of components and was considered the ideal industry to stimulate manufacturing activities based on the substitution of imported components (tyres, pistons, etc) with local parts.

Thus, it is no wonder that Malaysia, Indonesia, the Philippines and Thailand pushed to develop this sector after seeing the successes it enjoyed in Japan and Korea.

In 1983, Tun Dr Mahathir Mohamad, then Prime Minister, established Proton to build the national car in collaboration with Mitsubishi. The legendary Proton Saga rolled out in 1986 as the first model of our national car (NC).

In 1993, Perodua was established and, in collaboration with Daihatsu, launched the Perodua Kancil as the second NC serving the 1300cc car segment.

The main objective of the automotive vision was to spin off local (particularly bumiputra) suppliers, create job opportunities, upgrade the know-how of our workforce and, ultimately, to create a local identity for the Malaysian automobile sector.

Past challenges and aspirations

The main challenge for Malaysia’s car industry was market size. In the early 1980s, the Malaysian market for passenger vehicles was about 80,000 units per year – slightly less than the minimum efficient size for automobile manufacture of 100,000 units per year.

Unfortunately, the mid-1980s also saw the world going into a deep recession. And the Malaysian automobile market was further worsened by the fragmentation of a large number of auto models and assemblers.

The Government remedied the shortfalls by using licensing procedures together with high tariffs for non-national car (NNC) models.

This, of course, resulted in substantial price differences between Proton Saga and other NNC models, enabling the Saga to capture over 80% of the market share then.

The other car manufacturers (Tan Chong for Nissan and Oriental for Honda) were compensated with partnerships for the manufacture of Proton components and parts.

The Perodua Kancil, launched in 1994, also captured a large share of the 1300cc car market and quickly became part of the national automobile scene.

The main issue, ironically, was a severe constraint on choices for Malaysian car buyers. With high tariffs on NNC CKDs and imported components, consumers are penalised heavily if they choose to buy these (locally-assembled) NNC models, and with the AP system in place, prices for the imported models are even higher.

Several important points emerged from a comparison of car prices in the world (see relevant table).

The prices of NNC brands, naturally, are substantially higher than that of Proton or Perodua. For example, the Honda City (1500cc) priced at RM85,480 is 41% higher than Proton Gen2 (1600cc).

Prices of these NNC brands (such as Honda and Ford) are also substantially higher in Malaysia than the rest of the world, reflecting the adverse impact of our high duties on these cars in the local market.

Singapore is the exception here. Its car prices are far higher than other countries due to the cost of the “quota permit” being imposed on each car.

Another interesting point is that Proton and Perodua are being exported to other countries at prices even lower that the home market. For example, the Perodua Myvi is being marketed in Britain for RM36,792 compared with the home price of RM46,400. Whether this reflects export subsidy on the part of Proton and Perodua is an issue for us to reflect upon.

Why would Malaysian car buyers choose NNC brands despite their substantially higher prices? They will tell you that it is because of the advanced safety features not available in NC brands.

How APs came about and why

There is no written policy as such on the AP system, but it evolved in the 1970s initially to encourage bumiputra participation in the used car industry.

Contrary to what most people think, it was not introduced merely to protect Proton. Today, even the imports of hybrid or alternative-fuel cars require APs as there are no hybrid or alternative-fuel car manufacturers in Malaysia.

An AP is a licence issued to a vendor to sell foreign cars with no local content. There are two categories – Open APs and Franchise APs. The former allows the holder to import a car of any brand while the latter ties the holder to a particular brand.

There are currently 76 Open APs and 37 Franchise AP holders. The total number of APs issued was 51,559 in 2004, decreasing to 27,838 in 2007. But in 2008, it spiked to 40,886 before being reduced again to about 20,000 in 2009.

The AP System, with no transparent guidelines on the selection of holders (who, by definition, enjoy substantial monopolistic economic gains at the expense of consumers), has drawn a lot of criticism.

For example, several months ago Datuk Seri Nazir Razak (CEO of CIMB), in his luncheon address to the Chinese Economic Congress, reiterated that the AP system had been severely abused and should be abolished immediately.

Further, because of the anti-competitive nature of the AP System, it is deemed to be non-WTO (World Trade Organisation) compliant.

Hence it has also been severely criticised at many international trade forums. WTO has repeatedly urged the Government to abolish the system so that a more competitive and efficient automobile market can emerge in Malaysia.

It was under such a scenario that the Government pledged in 2006, under the National Automobile Policy (NAP), to phase out the AP system by Dec 31, 2010.

Unfortunately, subsequent intense lobbying by the AP holders resulted in a review of the NAP in 2009 by MITI (International Trade and Industry Ministry). Under the review, the Government extended the deadlines to 2015 for the Open APs and 2020 for the franchise APs. 

Cost to Malaysian consumers

Cars sales in Malaysia over the last five years have surged (see Table 2), increasing from 490,768 units in 2006 to 605,156 units in 2010. This surge has largely been facilitated by easy availability of credit at low interest rates, and a high level of subsidy on petrol prices.

The table on Malaysian Car Sales shows that Proton and Perodua are the main players, commanding about 55% of the market share. But it also shows that despite the big price differences between NC and NNC brands, NNC brands (especially Toyota and Honda) have still managed to acquire a substantial share (at 45%) of the market.

This is because Malaysian car buyers are generally prepared to pay the initial higher prices for the NNC brands because of their more advanced features, resulting in better reliability and lower maintenance costs compared with Proton or Perodua.

Further, because of the large subsidy on petrol prices, the cost of running a car in Malaysia is relatively affordable. As the table on car ownership shows, the price of one litre of RON95 is RM1.90 in Malaysia compared with RM3.05 in India and RM5.32 in Britain.

Assuming a five-year lifespan for a car, and an average consumption of 400 litres per month, the cost of owning and running a Ford Fiesta is RM23,098 per year compared with Proton Gen2’s RM21,218 per year. At this range of minimal cost differences, it is not surprising that NNC brands can still command a sizeable share of the local automobile market.

ue11.jpgThe table also shows that, on a global basis, the cost of owning and running a NNC (such as Honda or Ford) is about the same in Malaysia as in Thailand, China or India. For example, the cost of owning and running a Honda Civic for a year is RM32,116 in Malaysia compared with RM33,705 in India and RM30,224 in Thailand.

This is because the higher taxes levied on these brands in Malaysia have been offset by the greater subsidies Malaysian car users enjoy at the pumps.

Disconnect with world trends

The 10% ceiling on imported cars and the fact that Proton has refused, despite repeated probing by the Government, to conclude a strategic partnership with a world automobile company demonstrate just how disconnected our car industry is with the rest of the world.

Under a regime of prolonged high domestic protection, our national car manufacturers have neither the incentives nor the urgency to innovate and be front-runners in the automobile industry.

After over 25 years since its formation, Proton is still manufacturing conventional cars based largely on replication of other manufacturers’ models.

Even among conventional cars, its makes are not up to world benchmarks in terms of quality and safety. For example, not many people realise that the official Proton cars currently used by Cabinet Ministers are not even equipped with air bags. Merci­fully, these official cars at least have safety belts!

More importantly, with surging oil prices, the trend worldwide now is rapid development and utilisation of advanced technology in electric, hybrid or alternative-fuel vehicles.

In 2010, more than 40 million hybrid and alternative-fuel vehicles were sold worldwide.

Brazil is the leading nation in the production of flexible-fuel vehicles.

In 2010, it sold 10.6 million units of such vehicles, followed by the US with 9.3 million units. The US is the world’s leader in terms of hybrid cars, producing more than 1.8 million units in 2010. It is followed by Japan with 1.1 million units.

In the development of natural-gas cars, Pakistan is a world leader, producing 2.4 million such cars in 2009. Iran, with 1.7 million units, is next. Thailand and China are also aggressively manufacturing hybrid cars.

In Malaysia, we are totally out of sync. As hybrid cars are still not being assembled or manufactured locally, Malaysian consumers will have to get an AP first before they can buy such cars. This is despite the fact that the Government has already abolished all levies on the import of these models below 2,000cc.

Further, to support the use of alternative-fuel cars, we need to develop a national system to supply such fuel (e.g. natural gas). For electric or hybrid cars, we need to develop a system for the convenient charging of the batteries on highways, as well as repairs and maintenance of the batteries.

The NAP has not specified strategies or incentives to develop these supporting infrastructures.

In summary, the current protective AP system is not only a burden to Malaysian car owners, it also hinders the local automobile industry’s connection with the global trend towards the development and utilisation of green cars.

Moving forward

After over three decades of protection, the Government must take bold steps to reform the auto­motive industry. It needs to undergo transformation in the same way the electrical and electronics (E&E) sector has since the 1970s.

The Government has declared its intention to abolish the APs. However, as pointed out earlier, even the 2015 and 2020 targets are already a postponement of the original target of 2010.

The argument for the postponement was again to give the relevant automobile players time to adjust to the new reality.

I personally feel that Malaysian consumers have been paying far too much to sustain the livelihood of these key players.

Requiring Malaysian car buyers to wait until 2015 and 2020 for the sector to completely open up is a huge burden for them, particularly for youths with first jobs who are seeking to buy their first cars.

The Government should consider phasing out the entire AP system earlier, say by 2015.

Further, considering that there is now a global excess manufacturing capacity of 20 million units of conventional cars, we should also be less ambitious with our automotive industry.

The sector requires huge expen­diture on R&D, and many countries are already far ahead of us in the new automotive trends.

Needless to say, we cannot afford giving our car manufacturers another 20 years of further protection.

Following the successful experience of China and Thailand, our strategy should be to open up the sector to FDIs, and encourage the best global automobile manufactures, in collaboration with local partners, to be the leaders in the market.

With their global marketing strategies, Malaysia can emerge as a focal point of their new supply chains, particularly for components of advanced technology cars for the huge China market.

As immediate steps, I urge the Government to quickly abolish the AP requirement for hybrid and alternative fuel cars. It should also accord tax incentives (such as double tax deduction) to buyers of such vehicles.

At the same time, subsidies on petrol prices should be gradually removed to compel conventional car users to adapt to the reality of high fuel prices.

Given our large reserves of natural gas, we should also take immediate steps to establish a national natural-gas supply system for natural-gas cars. This infrastructure is crucial for the mass utilisation of this alternative fuel vehicle.

Weaning the Malaysian automobile industry away from dependence on conventional cars towards green vehicles, as well as steering away from continued protection of Proton and Perodua to an open automobile market, would be the most welcomed gifts that our Prime Minister can bestow to Malaysian car users and the Malaysian public at large.

> Tan Sri Dr Fong Chan Onn was Prof of Applied Economics and Dean of Faculty of Economics and Administration, Universiti Malaya. He served in the Government as Deputy Minister of Education (1990-1999) and as Minister of Human Resources (1999-2008). Currently, he is the MP for Alor Gajah.

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